
Whitney Tilson and Glenn Tongue of T2 Partners believe the housing-market collapse will have five distinct phases. In their opinion, we're just finishing up Phase 2 and moving into Phase 3.
Here are three excerpts from T2's recent presentation on the housing and mortgage collapse. The full presentation is embedded below. You can also download it here.
The Past: Losses Mostly Behind Us:
• Wave #1: Borrowers committing (or the victim of) fraud & speculators, who
defaulted quickly. Timing: beginning in late 2006 (as soon as home prices
started to fall) into 2008. Mostly behind us.
• Wave #2: Borrowers who defaulted when their mortgages reset due to
payment shock. Timing: early 2007 (as two-year teaser subprime loans written in early 2005 started to reset) to the present. Now tapering off as low interest rates mitigate payment shock.
The Future: Losses Mostly Ahead of Us
• Wave #3: Prime loans (most of which are owned or guaranteed by the
GSEs) defaulting due to job loss and home price declines (i.e., underwater
homeowners). Timing: started to surge in early 2008 to the present.
• Wave #4: Jumbo prime, second lien and HELOCs (most of which are on
banks’ books) defaulting due to job loss and home price declines/
underwater homeowners. Timing: started to surge in early 2008 to the
present.
• Wave #5: Losses among loans outside of the housing sector, the largest of
which will be in the $3.5 trillion area...
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